Column-EU ban on Russian crude to worsen global flow disruptions: Russell


LAUNCESTON, Australia: The European Union’s decision to cut its oil imports from Russia by 90% will accelerate a move already underway that Moscow is trying to sell as much crude as possible to Asian buyers.

Russia will likely find China and India particularly willing, as the former reopens much of its economy from strict zero-COVID lockdowns and the latter seeks to reduce its exorbitant energy import bill.

The EU has agreed to end maritime crude imports from Russia, European Council President Charles Michel said in a tweet after a two-day summit of the bloc’s 27 leaders.

“This immediately covers over 2/3 of oil imports from Russia, cutting off a huge source of funding for its war machine. Maximum pressure on Russia to end the war,” he said .

The remaining third of EU oil imports from Russia pass through the Druzhba pipeline, but Poland and Germany aim to stop purchases by the end of the year, which would mean the EU will end 90% of all crude purchases from Russia.

News of the ban kept Brent futures well priced, with the more active August contract hitting $118.80 a barrel at the start of trading, down from $117.60 at Monday’s close.

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Benchmark first-month futures are up around 26% since hitting $96.93 a barrel on March 16, which was the lowest price since Russia invaded neighboring Ukraine on February 24, an act that triggered a series of sanctions by Europe and other Western countries. against Moscow.

So far Russia has been able to export crude at volumes little changed from before the attack on Ukraine, with commodity consultants Kpler estimating that May exports will be the highest since October 2019.

Exports from Russia are forecast at 5.09 million barrels per day (bpd) in May, compared to 5.10 million bpd in October 2019.

The shift in buyers is already visible, with exports to China pegged at 1.04 million bpd, down from 937,000 bpd in April, while shipments to India were forecast at 853,000 bpd, from a record 1 .09 million bpd in April, but well above. pre-invasion levels of about 57,000 bpd in January.

Maritime exports to Europe were estimated by Kpler at 2.23 million bpd, down from 2.42 million bpd in April and the lowest monthly total since July 2020, which was at the height of the COVID-19 lockdowns. 19.

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The question for crude oil markets is how successful Russia will be in finding new buyers to replace its customers in Europe, and even if it can find willing buyers, will it be physically able to ship crude on long sea routes from its ports in Europe to Asia.

Russia could supply up to 900.00 bpd to India, if the government uses its entire fleet of Sovkomflot tankers, JP Morgan commodity analysts said in a May 25 note, but it is more likely that Asia’s second-largest oil importer will actually take about 500,000 bpd.

India’s own tanker fleet could add another 500,000 bpd via the Suez Canal, if fully mobilized to transport Russian crude, analysts said.

China’s COSCO could import 1.8 million bpd of Russian crude on the St. Petersburg-Shanghai route, JP Morgan said.

However, these assumptions work on the basis that India, China and Russia are using almost all of their tanker capacity, which is unlikely to happen in reality.

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What is more likely is that China and India will increase imports from Russia, but not enough to offset the loss of European imports.

Another question is how Europe will replace Russian crude, given that refineries will want to process oil of similar quality to Urals, the main quality currently supplied to Europe.

This limits the pool of suitable rough, and it becomes even more limited if purchases have to be made in cash.

Some grades of crude from Angola and Nigeria, as well as some from the Middle East, have grades similar to those from the Urals, which has an API gravity of 30.6 and a sulfur percentage of 1.48, which which makes it a medium acid oil.

The EU move is likely to cause further disruption to global crude flows, and these are further likely to increase transportation and other costs and raise security of supply concerns.

(Edited by Himani Sarkar)


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